2005 will be remembered as one of the most tumultuous years ever for business with virtually every sector coming through 12 months marked by upheaval and change.

Insurance

The Island?s economic pillar ? insurance and reinsurance ? was thrown numerous curve balls through the year.

The biggest financial hit was the billions of dollars in claims Bermuda companies are having to pay out on policies in hurricane-prone areas pummelled by record 2005 storm activity from hurricanes Katrina, Rita and Wilma. The Island?s insurers and reinsurers have already announced losses of $10 billion and loss revisions could push already recorded third-quarter losses higher. Wilma?s losses are not due to be recorded until the fourth quarter, scheduled for release in early 2006.

While insurers were hit by billion dollar hurricane losses ? with wide estimates of how much the 2005 storm season could cost, ranging up to a total of $80 billion in insured losses ? investors saw opportunity. Money flowed into the industry from private equity firms, hedge funds and capital market investors, based on the expectation that insurance and reinsurance capacity would be constrained by the losses. This resulted in expectations that 2006 policy rates could rise by 40 percent or more. In total more money than was sapped from insurance balance sheets has been tapped from investors.

Investors put their money behind established companies, and a wave of start-up insurers. Ten major new companies won licences to join the Bermuda market ahead of the pivotal January 1 renewal period. Most are capitalised in the $1 billion range, with rating agencies like A.M. Best and Standard&Poor?s demanding greater capital be held by companies selling policies at risk of seeing large losses, like property-catastrophe reinsurers prone to losses when strong storms make land in populated areas.

Some enmity crept into the Bermuda insurance market when specialist staff ? like underwriters and modellers ? were poached by the so-called ?Class of 2005? start-ups from established rivals.

There were numerous ratings warnings and downgrades to Bermuda insurance and reinsurance companies that saw shareholders? equity sapped by storm losses. Most had had their ratings affirmed by year?s end, though some companies remained on negative watch, meaning a downgrade has not been ruled out.

Earlier in the year insurers found themselves under increasing regulatory scrutiny. A regulatory investigation launched in late 2004 to look into questionable compensation of brokers ? those that arrange the sale of a company?s policies ? and illegal bid rigging practices, broadened to scrutiny of accounting abuses and the misuse of offshore reinsurers too closely affiliated with the insurer being covered.

The probe, led by New York Attorney General Eliot Spitzer, largely focused on alleged abuses at American International Group Inc., but also included a raft of subpoenas to Bermuda companies for information, mostly about the use of finite risk, a loss mitigation product authorities believe can be misused to mask losses. The companies having to comply with regulatory requests included Ace Limited, Arch Capital, Axis Capital, Endurance Specialty, Everest Re, the Imagine Group, Partner Re, Renaissance Re, Platinum Underwriter Holdings and XL Capital.

Regulatory scrutiny of AIG led its board of directors to oust several executives including longtime chief Maurice (Hank) Greenberg, and in Bermuda, a lawyer for various AIG entities and affiliates, Michael Murphy, was let go for alleged failure to cooperate with some requests for information.

Mr. Murphy continues to work in Bermuda for Starr International Company, a lucrative private company controlled by Mr. Greenberg, that previously functioned as a deferred compensation vehicle to reward chosen AIG executives. SICo?s largest asset is its stake in AIG, with it holding some $18 billion in company shares. A legal war has broken out between AIG and SICo over the shareholding.

RenaissanceRe?s chief executive Jim Stanard, who founded the company in late 1992, was forced out after the company came under heavy regulatory fire for having to restate prior-year results because of a multi-year contract from Inter-Ocean Reinsurance did not pass risk transfer tests. Inter-Ocean bowed out of business earlier in the year. It largely did business with its owner companies, including RenRe, and is now in run off. Mr. Stanard had been one of the industry?s best paid executives.

While insurers got some break on brokerage fees in 2005, after controversial commission payments were dropped by major brokers, management said the savings were more than eaten up by legal costs in complying with regulatory enquiries.

Individual companies also faced a few bumps, with both of the Island?s leading insurers ? Ace Ltd. and XL Capital ? having to take charges related to prior-year acquisitions. Ace was forced to once again boost its reserves in 2005, resulting in a net charge of $354 million, for claims developing on asbestos policies sold by Cigna P&C in years past. Ace bought the business in 1999. And XL Capital lost a battle with Credit Suisse over how much should be paid into a reserve fund to cover claims on policies sold earlier by Winterthur units, which XL bought in 2001. The company will record a charge in excess of $800 million in the fourth quarter after writing down a $1.45 billion reinsurance recoverables balance from Credit Suisse, it announced.

Both Ace and XL maintain that the acquisitions, despite the costs, were key to helping each establish themselves as leading, global companies.

Some insurers hit bumps they couldn?t recover from. Rosemont Re, a Bermuda reinsurance unit of UK insurer Goshawk, was forced to close its doors. And Alea, a global insurance group based in Bermuda, also faced an uncertain future after negative ratings actions forced it to consider the sale of its units, or put them into run-off. An insurer in run-off generally keeps a skeleton staff to honour claims that are filed, but does no new business.

Banking

The Bank of Butterfield continued in 2005 to generate solid earnings in Bermuda, and through its operations in the Caribbean and UK. The bank, Bermuda?s oldest, has bolstered its reach through several strategic acquisitions in the Caribbean and UK in recent years.

Butterfield chief executive Alan Thompson said the bank has a winning formula ? and he doesn?t see any need to change it despite the trend for small banks to be sold out to bigger competitors, including Bermuda rival, the Bank of Bermuda.

Butterfield has nearly doubled its assets in the last three years, from $5.5 billion to $9 billion. And its assets under administration last year grew to more than ten times that ? $94.2 billion.

Capital G, the Island?s smallest and most recently licensed bank, also saw record earnings. In July it said earnings for the fiscal year ended January 31 jumped 44 percent to $7.2 million. Customer deposits grew 19 percent.

Comparative data was not made public by the Bank of Bermuda, which since a 2004 acquisition has not disclosed its own financials.

For the Bank of Bermuda, 2005 marked its first full year under HSBC Plc., the multinational banking giant that was the first foreign corporation to move into the Bermuda banking market with its February 2004 takeover. As the bank promised when it was negotiating the HSBC sale, job cuts started in 2004 continued in 2005.

Management earlier predicted up to 250 Bermuda jobs could be axed during its first two years under HSBC, some through redundancies and others through natural attrition.

While job cuts have not reached that level, early cost-cutting measures were deemed to be on track by HSBC when it made good on a healthy bonus promised as a reward to management for job cuts or operational savings.

Chief executive Philip Butterfield in an interview earlier in the year confirmed he and four other bank executives were paid a multi-million dollar bonus in 2005, after achieving set targets HSBC had held them to. The other executives were former chief executive Henry Smith, now chief executive of investment firm W.P. Stewart, head of private client services Wayne Chapman, head of banking services Michael Collins and head of the bank?s fund administration arm, Global Fund Services, Paul Smith. Together the five were due $6.6 million in cash and a further $4.7 million in HSBC shares to vest in three years. Mr. Smith?s bonus payment was not tied to the performance targets.

Eighty Bermuda redundancies have been made by the bank since the sale. Of those, 38 announced in 2005 had not yet taken effect by year?s end, a spokesperson said. There were 165 hires made by the bank in 2005 ? 123 to Bermudians and 42 to expatriate workers. The bank?s total staffing grew to 1,078 at the end of 2005. While the employee count is higher than a year ago it compares to a head count of around 1,800 before the bank?s sale to HSBC. The bank shed hundreds of staff employed in its global offices after the sale when those operations were either closed or integrated into HSBC.

While the bank?s sale to HSBC was supported by a majority of shareholders, the bank may have undermined some of the community support it had with the decision to acquire the property of now defunct Front Street retailer Trimingham Brothers Ltd., and to erect a seven-storey office tower on the site.

Planning approval for the development is still pending. It has been reported that Government has been in negotiations to buy some of the properties the bank plans to move out of when it relocates several hundred staff to the new Front Street facility. Critics questioned whether this put Government in a compromising position of needing to ink the approval for redevelopment of the Trimingham?s site so it could buy the real estate.

The Bank of Bermuda also saw a longstanding legal dispute with aggrieved businessman Harold Darrell dropped during the year, just ahead of a November Supreme Court date. Mr. Darrell, who had alleged a bank officer was guilty of a breach of confidentially of his personal financial information several years ago, continues with a human rights complaint against bank directors. He alleges racial discrimination was at the root of directors not taking action on his confidentiality breach complaint. A specially-appointed human rights Tribunal sat in 2005, and is due to reconvene on the matter in the first half of 2006.

Investment business

Bermuda saw the departure of some mutual and hedge funds during the year because of worries over the European Union Tax Directive.

Under the directive ? which took effect on July 1 ? financial institutions in EU member states, and certain dependent and associated territories of member states, agreed to submit information about savings income received by EU citizens not resident in the country where their account was based.

Bermuda itself was never part of the directive, however some of the Island?s funds and collective investment schemes which have their paying agents located in countries subject to the directive, have been caught in the directive?s scope. This is because of how some countries, particularly Switzerland, have applied ?home rules?.

The Finance Ministry carried out an analysis of the impact of the directive on Bermuda?s financial services sector and said it found the impact of the directive has ?not been entirely negative?. This is because the Island?s trust sector saw a jump in activity as paying agents which pay out funds to European clients moved to Bermuda.

Retail

Bermuda?s retail sector was hit in 2005 with the closure of department stores Trimingham Brothers Ltd. and H.A.& E. Smith?s, two Front Street icons that had for decades defined the Bermuda shopping experience for many locals and visitors.

Trimingham?s said its decision to close was because of a continued downturn in sales, taking Smith?s with it after its untimely takeover the year before that Trimingham?s thought, wrongly, might improve its fortunes.

Also this year, A.S. Cooper & Son?s, the third Front Street department store, relocated to a network of smaller shops around Hamilton in order to demolish its building, making way for a new development.

Retailers petitioned Government both at Budget time, and then made renewed calls after Trimingham?s spring announcement it would close in late July, for relief. Finance Minister Paula Cox said she did not think the sector was suffering to the point of needing Government support.

Retailers have been lobbying for several years for lower duty rates and/or concessions similar to those extended to hotels and restaurants which provides duty relief for materials brought in for refurbishment.

During the year, Government did extend permission to all retailers to obtain a licence to open for Sunday trading between the hours of 1 p.m. and 6 p.m. Take-up for the new licences was lukewarm but those who did open up seven days were pleased with the response. And more shops took advantage of the permission during the Christmas period.

Retail sales were strong during some months of the year, but some shopkeepers took big knocks. For example, in August, apparel sales fell 22.5 percent, just when clothing stores thought they might pick up business that previously went to Trimingham?s and Smith?s.

Inflation through the first ten months of the year was, on average, slightly lower than in 2004, meaning a slighter dent on consumer dollars. The ten-month average tracked around 3.25 percent while inflation averaged 3.5 percent over the whole of 2004.

Telecoms

The Island?s telecoms sector saw continued price warring as providers of cellular phone service, long-distance service and Internet access continued to periodically announce new prices, undercutting competitor offerings.

Numerous of the Island?s telecommunications companies saw services downed by the Belco black-out. And North Rock Communications, an Internet and wireless telephone service provider suffered periodic technological glitches from spam attacks.

Petitions from TeleBermuda International and Cable&Wireless to enter the residential Internet market also set the stage for a renewed turf war. Government?s decision on the applications was not known at Press time, but those in the sector predicted officials would not approve the requests.

Digicel, the leading Caribbean mobile phone company, officially moved into the Bermuda market late in the year, when it acquired the Caribbean businesses previously held by Cingular Wireless.

Regulatory front

In 2005, the Island?s financial services regulator, the Bermuda Monetary Authority, was given a largely clean bill of health after an intensive review of its financial services regulation controls by the International Monetary Fund. There were a few areas the IMF said could be improved including greater operational independence of the Authority from Government, additional staff training, the introduction of further rules for shareholder protection and a change in the regulation of issuers, including supervision of Bermuda stock exchange?s regulation of listed issuers.

At least one of the companies was banking its proceeds in Bermuda from unlicensed insurance business conducted in the US resulting in the Director of Public Prosecutions getting a court order to freeze the funds, pending legal and regulatory actions.

In September, the BSX was granted Designated Investment Exchange Status by the UK Financial Services Authority, a designation it had worked toward for several years. It was also recognised by Australian authorities, at around the same time as Government inked an agreement to share certain financial information, for tax purposes, on Australian individuals or entities in Bermuda.

Around the courts, Bermuda Chief Justice Richard Ground in December said plans to establish a new commercial court to deal with trade disputes was to be realised in January. The new court is intended to resolve business cases, mainly complaints involving the Island?s insurance and reinsurance industry.

Politics

On the political front, Bermuda?s top three business associations each sounded a note of caution in 2005 on the Island becoming Independent of Great Britain. The Association of Bermuda International Companies (ABIC) and the Association of Bermuda Insurers and Reinsurers (ABIR) said Bermuda walked a perilous path if it went Independent, particularly in light of the comfort Island companies feel from access to the English system of Law.

Some have suggested Bermuda, if it achieves nationhood, could abandon the UK Privy Council in favour of the young Caribbean Court of Justice.

ABIC and ABIR have also expressed concern over whether the Bermuda dollar would sustain its value in an independent economy.